The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
|
NOTE 1. ORGANIZATION
U.S. Global Investors, Inc. (the “Company” or “U.S. Global”) serves as investment adviser to U.S. Global Investors Funds (“USGIF” or the “Fund(s)”), a Delaware statutory trust that is a no-load, open-end investment company offering shares in numerous mutual funds to the investing public. The Company also provides administrative services to USGIF. For these services, the Company receives fees from USGIF. The Company also provides advisory services to SEC registered exchange traded funds (“ETFs”) and formerly provided advisory services to offshore clients. Until March 2020, the Company held a controlling interest in Galileo Global Equity Advisors Inc. (“Galileo”), a privately held Toronto-based asset management firm.
The Company has the following subsidiaries utilized primarily for corporate investment purposes: U.S. Global Investors (Bermuda) Limited (“USBERM”), incorporated in Bermuda, and U.S. Global Investors (Canada) Limited (“USCAN”). The Company created U.S. Global Indices, LLC, a Texas limited liability company, of which the Company is the sole member, to provide indexing services to exchange-traded funds managed by the Company.
U.S. Global formed U.S. Global Brokerage, Inc. (“USGB”) to provide distribution services to USGIF. USGB ceased operations in December 2015. On July 27, 2018, USGB was dissolved.
Effective March 2, 2020, the Company sold its shares in Galileo back to Galileo. Through the date of sale, Galileo was consolidated with the operations of the Company. The non-controlling interest in this subsidiary was included in “Non-Controlling Interest in Subsidiary” in the equity section of the Consolidated Balance Sheets. Frank Holmes, CEO, and Lisa Callicotte, CFO, served as directors of Galileo through March 2, 2020, and Lisa Callicotte served as CFO of Galileo from June 2019 through March 2, 2020. See Note 3 below for further information. Results of operations of Galileo through the date of sale are presented in the consolidated financial statements as discontinued operations.
To limit the spread of the novel coronavirus (“COVID-19”), governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations, disrupting the global supply chain, and creating a reduction in demand for many products. This has negatively affected global financial markets and has caused significant financial market depreciation, thus reducing certain of the Company’s assets under management (“AUM”), the revenue related to those assets, and returns on corporate investments.
Should the negative effect on global financial markets continue for an extended period, there could be an adverse material financial impact on the Company’s results of operations, cash flows and financial position. At this time, the Company cannot reasonably estimate the future impact, given the uncertainty over the duration and severity of the economic crisis.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: USGB, USBERM, USCAN and U.S. Global Indices, LLC.
Until March 2, 2020, the Company, through USCAN, owned 65 percent of the issued and outstanding shares of Galileo, which represents controlling interest of Galileo. Galileo was consolidated with USCAN and the non-controlling interest in this subsidiary is included in “non-controlling interest in subsidiary” in the equity section of the Consolidated Balance Sheets.
There are two primary consolidation models in U.S. GAAP, the variable interest entity (“VIE”) and voting interest entity models. The Company’s evaluation for consolidation includes whether entities in which it has an interest or from which it receives fees are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the group of holders of the equity investment at risk lacks certain characteristics of a controlling financial interest. The primary beneficiary is the entity that has the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns and consolidates the VIE on the basis of having a controlling financial interest.
The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain funds it advises, specifically, certain funds in USGIF. The Company’s interests in these VIEs consist of the Company’s direct ownership therein and any fees earned but uncollected. In the ordinary course of business, the Company may choose to waive certain fees or assume operating expenses of the funds it advises for competitive, regulatory or contractual reasons (see Note 5 for information regarding fee waivers). The Company has not provided financial support to any of these entities outside the ordinary course of business. The Company’s risk of loss with respect to these VIEs is limited to the carrying value of its investments in, and fees receivable from, the entities. The Company does not consolidate these VIEs because it is not the primary beneficiary. The Company’s total exposure to unconsolidated VIEs, consisting of the carrying value of investment securities and receivables for fees, was $7.0 million at June 30, 2020, and $8.8 million at June 30, 2019.
Since the Company is not the primary beneficiary of the above funds it advises, the Company evaluated if it should consolidate under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of any of the above funds it advises; therefore, the Company does not consolidate any of these funds.
The Company currently holds a variable interest in a fund organized as a limited partnership advised by Galileo, and during fiscal year 2019 held a variable interest in another fund advised by Galileo, but these entities do not qualify as VIEs. Since they are not VIEs, the Company evaluated if it should consolidate them under the voting interest entity model. Under the voting interest model, for legal entities other than partnerships, the usual condition for control is ownership, directly or indirectly, of more than 50 percent of the outstanding voting shares over an entity. The Company does not have control of the entities and, therefore, does not consolidate them. However, the Company was considered to have the ability to exercise significant influence. Thus, the investments have been accounted for under the equity method of accounting. See further information about these investments in Note 4.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified for comparative purposes.
Cash and Cash Equivalents. Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
Restricted Cash. Restricted cash represents cash invested in a money market account as collateral for credit facilities that is not available for general corporate use.
Investments. The Company records security transactions on trade date. Realized gains (losses) from security transactions are calculated on the first-in/first-out cost basis, unless otherwise identifiable, and are recorded in earnings on the date of sale.
Investments in Equity Securities. Equity securities are generally carried at fair value on the Consolidated Balance Sheets with changes in the fair value recorded through earnings within investment income (loss).
Investments in Debt Securities. The Company classifies debt investments as available-for-sale or held-to-maturity based on the Company’s intent to sell the security or, its intent and ability to hold the debt security to maturity. Available-for-sale debt securities are reported at fair value, and changes in unrealized gains and losses are reported net of tax in accumulated other comprehensive income (loss). Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to investment income (loss). Held-to-maturity debt securities are purchased with the intent and ability to hold until maturity and are measured at amortized cost.
Other Investments. Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. For these securities, the Company generally elects to value using the measurement alternative, under which such securities will be measured at cost, less impairment, plus or minus observable price changes for identical or similar securities of the same issuer with such changes recorded in investment income (loss).
Equity Method Investments. Investments classified as equity method consist of investments in companies in which the Company is able to exercise significant influence but not control. Under the equity method of accounting, the investment is initially recorded at cost, then the Company’s proportional share of investee’s underlying net income or loss is recorded as a component of “other income” with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce the Company’s carrying value of the investment. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. No impairment was recognized for the Company’s equity method investment during the years presented.
Fair Value of Financial Instruments. The financial instruments of the Company are reported on the Consolidated Balance Sheets at market or fair values or at carrying amounts that approximate fair values.
Receivables. Receivables other than notes receivable consist primarily of advisory and other fees owed to the Company by clients. The Company also may invest in notes receivable. Notes receivable are recorded in accordance with the terms of the agreement, and accrued interest is recorded when earned. Unearned fees are shown as a deduction from the related notes receivable and are amortized to interest income using the effective interest method. The Company reviews the need for an allowance for credit losses for notes and other receivables based on various factors including payment history, historical bad debt experience, existing economic conditions, aging and specific accounts identified as high risk. Uncollectible receivables, if any, are charged against the allowance when all reasonable efforts to collect the amounts due have been exhausted. The Company had no allowance for credit losses as of June 30, 2020, or 2019.
Property and Equipment. Fixed assets are recorded at cost. Depreciation for fixed assets is recorded using the straight-line method over the estimated useful life of each asset as follows: furniture and equipment are depreciated over 3 to 10 years, and the building and related improvements are depreciated over 14 to 40 years.
Leases. The Company leases equipment under various leasing arrangements. Leases may be classified as either financing leases or operating leases, as appropriate. The Company determines if a contract is a lease or contains a lease at inception. The Company accounts for its office facility leases as operating leases, which may include escalation clauses. The Company accounts for lease and nonlease components as a single component for its leases, except for real estate leases. The Company elected the short-term lease exception for leases with an initial term of 12 months or less. Consequently, such leases are not recorded on the Consolidated Balance Sheets. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain they will be exercised or not, respectively.
Fixed lease payments are included in right of use (“ROU”) assets and lease liabilities within other assets and liabilities, respectively, on the Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date using the Company’s incremental borrowing rate as the discount rate. Fixed lease payments made over the lease term are recorded as lease expense on a straight-line basis. Variable lease payments based on usage, changes in an index or market rate are expensed as incurred.
Upon adoption of ASU 2016-02, for existing leases, the Company elected to determine the discount rate based on the remaining lease term as of July 1, 2019. For new leases, the discount rates are based on the entire noncancelable lease term.
The Company is the lessor of certain areas of its owned office building under operating leases. The Company determines if a contract is a lease or contains a lease at inception. The Company elected not to separate lease and related non-lease components and account for the combined component as an operating lease.
Impairment of Long-Lived Assets. The Company reviews property and equipment and other long-lived assets for impairment whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable. Impairment is indicated when the assets’ net book value is less than fair value of the asset. If this occurs, an impairment loss is recognized for the difference between the fair value and net book value. Factors that indicate potential impairment include: a significant decrease in the market value of the asset or a significant change in the asset’s physical condition or use. No impairments of long-lived assets were recorded during the years included in these financial statements.
Non-Controlling Interests. The Company reports “non-controlling interest in subsidiary” as equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”
Treasury Stock. Treasury stock purchases are accounted for under the cost method. The subsequent issuances of these shares are accounted for based on their weighted-average cost basis.
Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. Forfeitures are recognized as they occur.
Income Taxes. The Company and its non-Canadian subsidiaries file a consolidated federal income tax return. USCAN and Galileo file separate tax returns in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes, resulting from the use of the liability method of accounting for income taxes. The liability method requires that deferred tax assets be reduced by a valuation allowance in cases where it is more likely than not that the deferred tax assets will not be realized.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2020, the Company did not have any accrued interest or penalties related to uncertain tax positions. The tax years from 2016 through 2019 remain open to examination by the U.S. Federal tax jurisdictions to which the Company is subject. The tax years from 2013 through 2019 remain open to examination by the non-U.S. Federal tax jurisdictions to which the Company is subject.
The Company has elected to treat the global intangible low-taxed income (GILTI) tax as a period expense. The Company also elected to use the tax law ordering approach when assessing the realization of net operating losses related to GILTI.
Revenue Recognition. The Company’s operating revenue is earned from investment advisory and administrative services provided to clients. Each distinct service promised in the agreements is considered a performance obligation and is the basis for determining when revenue is recognized. The fees are allocated to each distinct performance obligation and revenue is recognized when, or as, promises are satisfied. The consideration for services is generally variable and included in net revenues when it is improbable that a significant reversal could occur in the future. The timing of when clients are billed and related payment received varies in accordance with agreed-upon contractual terms. For current agreements, billing occurs after the Company has recognized revenue which results in accounts receivable and accrued revenue.
Investment Advisory Fees. The investment advisory agreements have a single performance obligation, since the promised services are not separately identifiable from other promises in the agreements and, therefore, are not distinct. Investment advisory fees are comprised of two components, a base fee and a performance fee, if applicable. Base investment advisory fees are recognized as the services are performed over time and are based upon agreed-upon percentages of average assets under management (“AAUM”), depending on contractual terms. These fees are received in cash after the end of each monthly period within 30 days. Investment advisory fees are affected by changes in assets under management, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Investment advisory fees are reported net of fee waivers.
Performance Fees. USGI receives investment advisory performance fees from certain funds. Performance fees for the equity funds within USGIF are a fulcrum fee that is a 0.25 percent adjustment upwards or downwards of the base investment advisory fees when there is a 5 percent difference between a fund’s performance and that of its benchmark index over the prior rolling 12 months. Performance fees are recorded when it is determined that they are no longer probable of significant reversal. These fees are received in cash or paid in cash after the end of each monthly period within 30 days. Performance fees are affected by changes in fund performance, benchmark index performance, and assets under management.
Administrative Services Fees. The administrative services agreement has a single performance obligation, since the promised services are not separately identifiable from other promises in the agreement and, therefore, are not distinct. Administrative services fees are recognized as the services are performed over time and are based upon agreed-upon percentages of AAUM. These fees are received in cash after the end of each monthly period within 30 days. Administrative services fees are affected by changes in assets under management, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Administrative services fees are reported net of fee waivers.
Fee Waivers. For certain clients, the Company has agreed to contractually limit the expenses or voluntarily waived or reduced its fees and/or agreed to pay expenses for the remaining USGIF funds. These fee waivers are deemed to be a reduction of the transaction price and are reported as a reduction of investment advisory fees and/or administrative services fees. These fees are paid in cash after the end of each monthly period within 30 days.
Dividends and Interest. Dividends are recorded on the ex-dividend date, and interest income is recorded on an accrual basis. Any discount between the cost and the principal amount of debt investments is amortized to interest income using the effective interest method. Both dividends and interest income are included in investment income.
Advertising Costs. The Company expenses advertising costs as they are incurred. The Company is reimbursed for certain advertising expenses related to USGIF from the distributor for USGIF.
Foreign Exchange. The balance sheets of certain foreign subsidiaries of the Company and certain foreign-denominated investment products are translated at the current exchange rate as of the end of the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange gains and losses resulting from balance sheet translations of foreign subsidiaries are excluded from income and are recorded in “accumulated other comprehensive income (loss)” on the Consolidated Balance Sheets. Net exchange gains and losses resulting from income or loss translations are included in income and are recorded in “investment income (loss)” on the Consolidated Statements of Operations. Investment transactions denominated in foreign currencies are converted to U.S. dollars using the exchange rate on the date of the transaction and any related gain or loss is included in “investment income (loss)” on the Consolidated Statements of Operations.
Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Earnings Per Share. The Company computes and presents earnings per share attributable to U.S. Global Investors, Inc. in accordance with ASC 260, Earnings Per Share. Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to U.S. Global Investors, Inc. by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised. The Company has two classes of common stock with outstanding shares. Both classes share equally in dividend and liquidation preferences.
Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (loss), net of tax, is reported in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders’ Equity and includes any unrealized gains and losses on debt securities classified as available-for-sale, foreign currency translation adjustments.
Recent Accounting Pronouncements and Developments
Accounting Pronouncements Adopted During the Period
In February 2016, the FASB issued ASU 2016-02, Leases, and has subsequently issued several amendments (collectively, “ASU 2016-02”), which replaces existing lease accounting guidance. ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet by recording a lease asset and a lease liability. The new standard also requires enhanced disclosure surrounding the amount, timing and uncertainty of cash flows arising from leasing agreements. The new guidance was effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. The Company elected the transition method at the adoption date of July 1, 2019, whereby it initially applied the new standard at the adoption date, versus at the beginning of the earliest period presented. Upon adoption, the Company elected the package of transition practical expedients which would allow the Company to carry forward prior conclusions related to: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. Additionally, the Company elected the practical expedient to not separate lease components from nonlease components for all except real estate leases. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheets and will recognize related lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The adoption resulted in a gross up in total assets and total liabilities on the Company’s Consolidated Balance Sheets. Upon adoption on July 1, 2019, the Company's total assets and total liabilities increased by less than $400,000.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allowed entities the option to reclassify tax effects resulting from recording the effects of the Tax Cuts and Jobs Act enacted in December 2017 from accumulated other comprehensive income to retained earnings. The guidance was effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted this standard on July 1, 2019, with no impact on its consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and has subsequently issued several amendments (collectively, “ASU 2016-13”). ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 will be effective for smaller reporting companies, including U.S. Global, for fiscal years beginning after December 15, 2022. Earlier application is permitted only for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). ASU 2019-04 clarifies areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825). The standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. The new guidance in ASU 2019-04 on recognizing and measuring financial instruments is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. If an entity has adopted all of the amendments to ASU 2016-01, it is permitted to early adopt the new guidance. The Company does not believe the adoption of this new amendment will have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
NOTE 3. DISCONTINUED OPERATIONS
USCAN entered into a binding letter of intent dated December 30, 2019, with Galileo whereby Galileo, pursuant to a capital restructuring, agreed to repurchase all of its common shares owned by USCAN for $1.0 million (Canadian). The transaction was subject to the approval of Canadian securities regulatory authorities and to the satisfaction of other closing conditions. The transaction closed effective March 2, 2020. Proceeds of approximately $746,000 were received (the equivalent of $1.0 million Canadian), and a realized gain of approximately $151,000 was recorded. In addition, approximately $228,000 in foreign currency loss was released from accumulated other comprehensive income (loss) into realized foreign currency loss upon closing the sale.
After the transaction, the Company has not and will not have continuing involvement with the operations of Galileo, except for an equity method investment in a fund managed by Galileo. See further information on this equity method investment in Note 4, Investments.
The results of Galileo through the March 2, 2020, closing date are reflected as “discontinued operations” in the Consolidated Statements of Operations and are therefore, excluded from continuing operations results. Comparative periods shown in the Consolidated Financial Statements have been adjusted to conform to this presentation. Operations of Galileo had previously been presented as the separate business segment of Investment Management Services – Canada.
The components of assets and liabilities classified as discontinued operations were as follows:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
1,482
|
|
Accounts and other receivables
|
|
|
-
|
|
|
|
200
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
52
|
|
Net property and equipment
|
|
|
-
|
|
|
|
38
|
|
Other assets, non-current
|
|
|
-
|
|
|
|
8
|
|
Total assets held related to discounted operations
|
|
$
|
-
|
|
|
$
|
1,780
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
135
|
|
Accrued compensation and related costs
|
|
|
-
|
|
|
|
84
|
|
Other accrued expenses
|
|
|
-
|
|
|
|
262
|
|
Total liabilities held related to discontinued operations
|
|
$
|
-
|
|
|
$
|
481
|
|
Receivables of Galileo included advisory fees owed to Galileo by the funds and clients it manages. Galileo fixed assets, consisting of furniture, equipment and leasehold improvements, were depreciated over 2 to 5 years. Galileo had leases for office equipment and facilities. See further information on these leases in Note 11, Leases.
The components of income (loss) from discontinued operations were as follows. Note that amounts in the current fiscal year are through the March 2, 2020, closing date of sale.
|
|
Year Ended June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
$
|
235
|
|
|
$
|
1,458
|
|
|
|
|
235
|
|
|
|
1,458
|
|
Expenses
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
77
|
|
|
|
534
|
|
General and administrative
|
|
|
508
|
|
|
|
1,121
|
|
Depreciation and amortization
|
|
|
6
|
|
|
|
10
|
|
|
|
|
591
|
|
|
|
1,665
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
24
|
|
|
|
18
|
|
Other income (loss)
|
|
|
(6
|
)
|
|
|
42
|
|
|
|
|
18
|
|
|
|
60
|
|
Loss from discontinued operations of investment management services in Canada before income taxes
|
|
|
(338
|
)
|
|
|
(147
|
)
|
Tax benefit
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations of investment management services in Canada
|
|
|
(338
|
)
|
|
|
(147
|
)
|
Less: net loss attributable to non-controlling interest from discontinued operations
|
|
|
(118
|
)
|
|
|
(51
|
)
|
Net loss attributable to U.S. Global Investors, Inc. from discontinued operations of investment management services in Canada
|
|
$
|
(220
|
)
|
|
$
|
(96
|
)
|
Galileo provides advisory services for clients in Canada and receives advisory fees based on the agreed-upon percentages of AAUM or assets under management, depending on contractual terms. Galileo investment advisory agreements have a single performance obligation, since the promised services are not separately identifiable from other promises in the agreements and, therefore, are not distinct. Galileo may also receive performance fees from certain clients when market appreciation or realized net gains exceeds established benchmarks on an annual or quarterly basis. Performance fees, which were included in advisory fees in the table above, were recognized when it was determined that they were no longer probable of significant reversal. Galileo recorded no performance fees for the year ended June 30, 2020. Galileo recorded performance fees of $921,000 for the year ended June 30, 2019. Galileo may, at its discretion, waive and absorb some of its clients’ operating expenses. The amount of fund expenses waived and absorbed was $39,000 and $343,000 for the years ended June 30, 2020, and 2019, respectively.
Galileo files a separate tax return in Canada. At June 30, 2019, a valuation allowance for Galileo of $183,000 was included to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet.
NOTE 4. INVESTMENTS
As of June 30, 2020, the Company held investments with a fair value of $11.4 million and a cost basis of $12.9 million. The fair value of these investments is approximately 60.9 percent of the Company’s total assets at June 30, 2020. In addition, the Company held other investments of approximately $1.3 million and investments of $158,000 accounted for under the equity method of accounting.
The Company’s equity investments with readily determinable fair values are classified as securities at fair value, and changes in unrealized gains or losses are reported in current period earnings.
Other investments consist of equity investments in entities over which the Company is unable to exercise significant influence and which do not have readily determinable fair values. For these securities, the Company generally elects to value using the measurement alternative, under which such securities are measured at cost, less impairment, plus or minus observable price changes for identical or similar securities of the same issuer with such changes recorded in investment income (loss). The Company considers many factors in determining impairment, including the severity and duration of the decline in value below cost, the Company’s interest and ability to hold the security for a period of time sufficient for an anticipated recovery in value, and the financial condition and specific events related to the issuer. The cost basis of investments may also be adjusted for the recharacterization of distributions from investments in partnerships. See further information about these investments in a separate section of this note.
The following details the components of the Company’s investments recorded at fair value as of June 30, 2020, and 2019.
|
|
June 30, 2020
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Unrealized Gains (Losses)
|
|
|
Fair Value
|
|
Securities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - International
|
|
$
|
5,641
|
|
|
$
|
(1,162
|
)
|
|
$
|
4,479
|
|
Common stock - Domestic
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
6,313
|
|
|
|
9
|
|
|
|
6,322
|
|
Mutual funds - Domestic equity
|
|
|
929
|
|
|
|
(266
|
)
|
|
|
663
|
|
Total securities at fair value
|
|
$
|
12,928
|
|
|
$
|
(1,464
|
)
|
|
$
|
11,464
|
|
|
|
June 30, 2019
|
|
(dollars in thousands)
|
|
Cost
|
|
|
Unrealized Gains (Losses)
|
|
|
Fair Value
|
|
Securities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - International
|
|
$
|
5,641
|
|
|
$
|
790
|
|
|
$
|
6,431
|
|
Common stock - Domestic
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
8,025
|
|
|
|
(4
|
)
|
|
|
8,021
|
|
Mutual funds - Domestic equity
|
|
|
929
|
|
|
|
(194
|
)
|
|
|
735
|
|
Total securities at fair value
|
|
$
|
14,640
|
|
|
$
|
547
|
|
|
$
|
15,187
|
|
Included in the above table was $7.0 million and $8.8 million as of June 30, 2020, and June 30, 2019, respectively, at fair value invested in USGIF.
Investment Income (Loss)
The following summarizes investment income (loss) reflected in earnings for the periods presented.
(dollars in thousands)
|
|
Year Ended June 30,
|
|
Investment Income (Loss)
|
|
2020
|
|
|
2019
|
|
Unrealized losses on fair valued securities
|
|
$
|
(2,011
|
)
|
|
$
|
(2,406
|
)
|
Unrealized gains on equity securities without readily determinable fair values
|
|
|
-
|
|
|
|
617
|
|
Realized gains on sales of fair valued securities
|
|
|
-
|
|
|
|
23
|
|
Realized gain on sale of subsidiary
|
|
|
151
|
|
|
|
-
|
|
Realized foreign currency losses
|
|
|
(232
|
)
|
|
|
(26
|
)
|
Impairments in equity investments that do not have readily determinable fair values
|
|
|
(285
|
)
|
|
|
(114
|
)
|
Dividend and interest income
|
|
|
166
|
|
|
|
324
|
|
Total Investment Income (Loss)
|
|
$
|
(2,211
|
)
|
|
$
|
(1,582
|
)
|
Realized gain from sale of subsidiary shown in the table above is from the sale of Galileo. See Note 2 for further information on this transaction. Realized foreign currency gains (losses) for the year ended June 30, 2020, includes $228,000 in foreign currency losses released from other comprehensive income (loss) upon the sale of Galileo.
The year ended June 30, 2020, included approximately $2.0 million of net unrealized losses recognized on equity securities still held at June 30, 2020.
Investment income (loss) can be volatile and varies depending on market fluctuations. The Company expects that gains and losses will continue to fluctuate in the future.
Fair Value Hierarchy
ASC 820, Fair Value Measurement and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Levels 1, 2, and 3 inputs, as defined below). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, value of these products does not entail a significant degree of judgment.
Level 2 – Valuations based on quoted prices in markets for which not all significant inputs are observable, directly or indirectly. Corporate debt securities valued in accordance with the evaluated price supplied by an independent service are categorized as Level 2 in the hierarchy. Other securities categorized as Level 2 included securities valued at the mean between the last reported bid and ask quotation and securities valued with an adjustment to the quoted price due to restrictions.
Level 3 – Valuations based on inputs that are unobservable and significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with the investing in those securities. Because of the inherent uncertainties of valuation, the values reflected may materially differ from the values received upon actual sale of those investments.
For actively traded securities, the Company values investments using the closing price of the securities on the exchange or market on which the securities principally trade. If the security is not traded on the last business day of the quarter, it is generally valued at the mean between the last bid and ask quotation. The fair value of a security that has a restriction is based on the quoted price for an otherwise identical unrestricted instrument that trades in a public market, adjusted for the estimated effect of the restriction. Mutual funds, which include open- and closed-end funds and exchange-traded funds, are valued at net asset value or closing price, as applicable. Certain corporate debt securities not traded on an exchange may be valued by an independent pricing service using an evaluated quote based on such factors as institutional-size trading in similar groups of securities, yield, quality maturity, coupon rate, type of issuance and individual trading characteristics and other market data. As part of its independent price verification process, a portfolio management team, which includes representatives from the investment and accounting departments, periodically reviews the fair value provided by the pricing service using information such as transactions in these investments, broker quotes, market transactions in comparable investments, general market conditions and the issuer’s financial condition. Certain debt securities may be valued based on review of similarly structured issuances in similar jurisdictions, when possible, or based on other traded debt securities issued by the issuer. The portfolio management team also takes into consideration numerous other factors that could affect valuation such as overall market conditions, liquidity of the security and bond structure. For other securities included in the fair value hierarchy with unobservable inputs, the portfolio management team considers a number of factors in determining a security’s fair value, including the security’s trading volume, market values of similar class issuances, investment personnel’s judgment regarding the market experience of the issuer, financial status of the issuer, the issuer’s management, and back testing, as appropriate. The fair values may differ from what may have been used had a broader market for these securities existed. The portfolio management team reviews inputs and assumptions and reports material items to the Board of Directors. Securities which do not have readily determinable fair values are also periodically reviewed by the portfolio management team.
The following presents fair value measurements, as of each balance sheet date, for the major categories of the Company’s investments measured at fair value on a recurring basis:
|
|
June 30, 2020
|
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Securities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - International
|
|
$
|
4,447
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
4,479
|
|
Common stock - Domestic
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
6,322
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,322
|
|
Mutual funds - Domestic equity
|
|
|
663
|
|
|
|
-
|
|
|
|
-
|
|
|
|
663
|
|
Total securities at fair value
|
|
$
|
11,432
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
11,464
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Securities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - International
|
|
$
|
5,599
|
|
|
$
|
832
|
|
|
$
|
-
|
|
|
$
|
6,431
|
|
Common stock - Domestic
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mutual funds - Fixed income
|
|
|
8,021
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,021
|
|
Mutual funds - Domestic equity
|
|
|
735
|
|
|
|
-
|
|
|
|
-
|
|
|
|
735
|
|
Total securities at fair value
|
|
$
|
14,355
|
|
|
$
|
832
|
|
|
$
|
-
|
|
|
$
|
15,187
|
|
As of June 30, 2020, approximately 100 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1. As of June 30, 2019, 95 percent of the Company’s financial assets were classified in the fair value hierarchy as Level 1 and 5 percent as Level 2.
The Company has an investment in 10 million common shares of HIVE Blockchain Technologies Ltd. (“HIVE”), a company that is headquartered and traded in Canada with cryptocurrency mining facilities in Iceland, Sweden, and Canada, at a cost of $2.4 million. The shares are subject to Canadian securities regulations. The investment was valued at approximately $2.4 million and $3.6 million at June 30, 2020, and 2019, respectively, based on the quoted market price and is classified as Level 1 in the fair value hierarchy. Cryptocurrency markets and related stocks have been, and are expected to continue to be, volatile. There has been significant volatility in the market price of HIVE, which has materially impacted the investment’s value included on the balance sheet and unrealized gain (loss) recognized in investment income. The Company’s ownership of HIVE was approximately 2.9 percent as of June 30, 2020. Frank Holmes is the non-executive chairman of HIVE and held shares and options at June 30, 2020. Effective August 31, 2018, Mr. Holmes was named Interim Executive Chairman of HIVE while a search for a new CEO is undertaken.
The Company has an investment in Thunderbird Entertainment Group Inc. (“Thunderbird”), a company headquartered and traded in Canada, which was valued at approximately $1.2 million at June 30, 2020 and classified as Level 1 in the fair value hierarchy. This investment was valued at approximately $1.1 million at June 30, 2019, of which $377,000 was classified as Level 1 and $675,000 was classified as Level 2 in the fair value hierarchy. This was previously a private company that underwent a corporate transaction and started trading on an exchange during the quarter ended December 31, 2018. The shares are subject to Canadian securities regulations. The Company’s ownership of Thunderbird was approximately 2.5 percent as of June 30, 2020. Frank Holmes serves on the board of this company as a director and held options at June 30, 2020.
The Company has an investment in GoldSpot Discoveries Corp. (“GoldSpot”), a company headquartered and traded in Canada, which was valued at approximately $806,000 at June 30, 2020, of which $774,000 was classified as Level 1 and $32,000 was classified as Level 2 in the fair value hierarchy. This investment was valued at approximately $1.7 million at June 30, 2019, of which $1.6 million was classified as Level 1 and $157,000 was classified as Level 2 in the fair value hierarchy. The investment was purchased during the quarter ended March 31, 2019, and the shares are subject to Canadian securities regulations. The portion of the investment classified in Level 2 is restricted for resale due to escrow and regulatory provisions; its valuation is based on the quoted market price adjusted for the restriction on resale. Shares remaining in escrow at June 30, 2020, will be released in August 2020. The Company’s ownership of GoldSpot was approximately 7.5 percent as of June 30, 2020. Frank Holmes served on the board of this company as director from February 2019 to June 2020 and as independent chairman from February 2019 to May 2020 and held common stock and options at June 30, 2020.
Other Investments
The carrying value of equity securities without readily determinable fair values was approximately $1.3 million and $1.4 million as of June 30, 2020, and 2019, respectively. The Company has elected to value these investments using the measurement alternative, under which such securities are measured at cost, less impairment, plus or minus observable price changes for identical or similar securities of the same issuer with such changes recorded in investment income (loss).
The carrying value of equity securities without readily determinable fair values has been adjusted as follows during the fiscal years ended June 30, 2020, and 2019:
|
|
Year Ended June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Carrying amount, beginning of period
|
|
$
|
1,404
|
|
|
$
|
2,207
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
125
|
|
|
|
250
|
|
Reclassification to securities at fair value
|
|
|
-
|
|
|
|
(1,499
|
)
|
Impairments
|
|
|
(285
|
)
|
|
|
(114
|
)
|
Other downward adjustments
|
|
|
(124
|
)
|
|
|
(57
|
)
|
Upward adjustments
|
|
|
163
|
|
|
|
617
|
|
Carrying amount, end of period
|
|
$
|
1,283
|
|
|
$
|
1,404
|
|
As discussed above, the Company’s investment in Thunderbird was previously included in other investments but started trading on a stock exchange during the quarter ended December 31, 2018, and thereafter is included in securities at fair value. There were impairment adjustments to one security totaling $285,000 during the year ended June 30, 2020, and $114,000 during the year ended June 30, 2019. Cumulative impairment adjustments to all equity securities without readily determinable fair values total $536,000 since their respective acquisitions through June 30, 2020. The cumulative amount of other downward adjustments, which primarily consist of return of capital distributions, is $777,000, which includes $124,000 for the year ended June 30, 2020, and $57,000 for the year ended June 30, 2019. The cumulative amount of upward adjustments is $780,000, which includes $163,000 for the year ended June 30, 2020, and $617,000 for the year ended June 30, 2019.
Investments Classified as Equity Method
During fiscal year 2018, the Company, through USCAN, invested approximately $401,000 in the Galileo Technology and Blockchain Fund, a Canadian unit trust investment fund managed by Galileo. The fund reorganized in a taxable transaction into a limited partnership effective November 30, 2018, and the fund terminated. See further discussion below. Thus, the Company no longer had an investment in the Galileo Technology and Blockchain Fund after November 2019. During the period of ownership, the Company’s ownership ranged between approximately 20 and 25 percent, and the Company was considered to have the ability to exercise significant influence. Thus, the investment was accounted for under the equity method of accounting. Included in other income (loss) was $50,000 of equity method loss for the Galileo Technology and Blockchain Fund for the year ended June 30, 2019. In addition, approximately $22,000 in foreign currency loss was released from accumulated other comprehensive income (loss) into realized foreign currency loss upon the termination of the fund. Frank Holmes also directly held an investment in the fund. This fund had a concentration in technology and blockchain companies, which resulted in volatility in the fund’s valuation.
As noted above, the Galileo Technology and Blockchain Fund reorganized into a limited partnership effective November 30, 2018. The investment portfolio and unitholders’ interests of the Galileo Technology and Blockchain Fund and the Galileo Partners Fund transferred to the new entity, named Galileo Technology and Blockchain LP. The valuation of the Company’s investment in the Galileo Technology and Blockchain Fund as of November 30, 2018, of approximately $230,000 transferred to the Galileo Technology and Blockchain LP. During the period of ownership, the Company’s ownership has ranged between approximately 16 and 22 percent The Company owns approximately 22 percent of the LP as of June 30, 2020, and the Company is considered to have the ability to exercise significant influence. Thus, the investment is accounted for under the equity method of accounting. Included in other income (loss) for the years ended June 30, 2020, and 2019, is ($142,000) and $73,000, respectively, of equity method income (loss) for this investment. The Company’s investment in the LP was valued at approximately $158,000 at June 30, 2020, and $309,000 at June 30, 2019. Frank Holmes also directly held an investment in the LP as of June 30, 2020. This investment has a concentration in technology and blockchain companies, which may result in volatility in its valuation.
NOTE 5. INVESTMENT MANAGEMENT AND OTHER FEES
The following table presents operating revenues disaggregated by performance obligation:
|
|
Year Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
USGIF advisory fees
|
|
$
|
3,093
|
|
|
$
|
3,230
|
|
USGIF performance fees paid
|
|
|
(525
|
)
|
|
|
(544
|
)
|
ETF advisory fees
|
|
|
1,743
|
|
|
|
588
|
|
Total advisory fees
|
|
|
4,311
|
|
|
|
3,274
|
|
USGIF administrative services fees
|
|
|
165
|
|
|
|
185
|
|
Total Operating Revenue
|
|
$
|
4,476
|
|
|
$
|
3,459
|
|
The Company serves as investment adviser to USGIF and receives a fee based on a specified percentage of net assets under management. The advisory agreement for the equity funds within USGIF provides for a base advisory fee that is adjusted upwards or downwards by 0.25 percent if there is a performance difference of 5 percent or more between a fund’s performance and that of its designated benchmark index over the prior rolling 12 months.
The Company has agreed to contractually limit the expenses of the Near-Term Tax Free Fund through April 2021. The Company has voluntarily waived or reduced its fees and/or agreed to pay expenses on the remaining USGIF funds. These caps will continue on a voluntary basis at the Company’s discretion. The aggregate fees waived and expenses borne by the Company for USGIF were $584,000 and $732,000 for the years ended June 30, 2020, and 2019, respectively. USGIF revenue included on the Consolidated Statements of Operations is net of fee waivers. Management cannot predict the impact of future waivers due to the number of variables and the range of potential outcomes.
The Company receives administrative service fees from USGIF based on the average daily net assets at an annual rate of 0.05 percent per investor class and 0.04 percent per institutional class of each fund. The institutional classes closed in July 2019.
The Company also serves as investment advisor to two exchange-traded funds (ETFs): U.S. Global Jets ETF (ticker JETS) and U.S. Global GO GOLD and Precious Metal Miners ETF (ticker GOAU). The Company receives a unitary management fee of 0.60 percent of average net assets and has agreed to bear all expenses of the ETFs.
As of June 30, 2020, the Company had $869,000 in receivables from fund clients, of which $187,000 was from USGIF and $682,000 from ETFs. As of June 30, 2019, the Company had $201,000 in receivables from fund clients, of which $159,000 was from USGIF and $42,000 from ETFs.
NOTE 6. RESTRICTED CASH
Restricted cash represents cash invested in a money market account as collateral for credit facilities that is not available for general corporate use. A reconciliation of cash, cash equivalents, and restricted cash reported from the Consolidated Balance Sheets to the Statements of Cash Flows is shown below:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
1,936
|
|
|
$
|
1,466
|
|
Restricted cash
|
|
|
1,025
|
|
|
|
1,025
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
2,961
|
|
|
$
|
2,491
|
|
NOTE 7. NOTES RECEIVABLE
The Company held a note receivable with principal of approximately $199,000 (all current) at June 30, 2019. The note was with an unrelated third party, had an annual interest rate of 15 percent and was scheduled to mature in 2021. Quarterly principal repayments on the note started in February 2019. The issuer elected an early redemption option and paid the note in full in July 2019. Proceeds were received for the principal and all accrued interest, and no gain or loss was realized. There were no notes receivable as of June 30, 2020.
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Building and land
|
|
$
|
4,597
|
|
|
$
|
4,597
|
|
Furniture, equipment, and other
|
|
|
847
|
|
|
|
1,051
|
|
|
|
|
5,444
|
|
|
|
5,648
|
|
Accumulated depreciation
|
|
|
(3,938
|
)
|
|
|
(3,940
|
)
|
Net property and equipment
|
|
$
|
1,506
|
|
|
$
|
1,708
|
|
Depreciation expense totaled $202,000 and $214,000 in fiscal years 2020 and 2019, respectively.
NOTE 9. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Professional fees
|
|
$
|
314
|
|
|
$
|
266
|
|
Vendors payable
|
|
|
113
|
|
|
|
103
|
|
ETF operating and distribution expenses
|
|
|
542
|
|
|
|
80
|
|
Taxes payable
|
|
|
46
|
|
|
|
47
|
|
Other accrued expenses
|
|
$
|
1,015
|
|
|
$
|
496
|
|
NOTE 10. BORROWINGS
The Company has access to a $1 million credit facility for working capital purposes. The credit agreement requires the Company to maintain certain covenants; the Company has been in compliance with these covenants during the fiscal year. The credit agreement will expire on May 31, 2021, and the Company intends to renew annually. The credit facility is collateralized by approximately $1 million at June 30, 2020, included in restricted cash on the balance sheet, held in deposit in a money market account at the financial institution that provided the credit facility. As of June 30, 2020, the credit facility remains unutilized by the Company.
Effective April 12, 2020, the Company was approved for a loan of approximately $442,000 under the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on future adherence to the forgiveness criteria as described below.
The Company has under 25 employees and is considered a small business. The interest rate on the loan is one percent fixed, and the maturity date is April 12, 2022. Payment terms are to make seventeen consecutive monthly payments of principal and interest in an amount sufficient to fully amortize the loan over the remaining term, commencing six months after the effective date, and a final payment on the earliest of the acceleration of the promissory note; or the maturity date. The PPP Loan contains events of default and other provisions customary for a loan of this type.
A key feature of the PPP is that loan proceeds used by borrowers to pay certain expenses during a specified period following origination of the loan may qualify to be forgiven. The Company is not yet able to determine the amount that might be forgiven due to evolving guidance.
As of June 30, 2020, the balance of the loan was $442,000, all of which was classified as a current liability. Interest expense was approximately $1,000 for the year ended June 30, 2020. As of June 30, 2020, the Company was in compliance with all covenants with respect to the PPP loan.
NOTE 11. LEASES
The Company has lease agreements on a continuing operations basis for office equipment that expire in fiscal years 2021 and 2022. Lease expense included in continuing operations totaled $153,000 and $167,000 for the years ended June 30, 2020, and 2019, respectively.
The Company’s former subsidiary Galileo, which is classified as discontinued operations as described in Note 3, had lease agreements for office equipment and for office facilities. Lease expense included in discontinued operations totaled $74,000 and $109,000 for the years ended June 30, 2020, and 2019, respectively.
For continuing operations, the components of lease expense included in general and administrative expense on the Consolidated Statements of Operations for the year ended June 30, 2020, and qualitative information concerning the Company’s operating leases were as follows:
|
|
Year Ended
|
|
|
|
June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
Operating lease cost
|
|
$
|
53
|
|
Short-term lease cost
|
|
|
100
|
|
Total lease cost
|
|
$
|
153
|
|
|
|
|
|
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
53
|
|
|
|
|
|
|
Right-of-use assets obtained in exchanged for:
|
|
|
|
|
Net operating lease liabilities
|
|
$
|
141
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
1.83
|
|
Weighted-average discount rate
|
|
|
4.11
|
%
|
Maturities of lease liabilities from continuing operations as of June 30, 2020, are as follows:
(dollars in thousands)
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
|
2021
|
|
$
|
53
|
|
2022
|
|
|
44
|
|
Total lease payments
|
|
|
97
|
|
Less imputed interest
|
|
|
(4
|
)
|
Total
|
|
$
|
93
|
|
The Company is the lessor of certain areas of its owned office building under operating leases expiring in various years through fiscal year 2023. At the commencement of an operation lease, no income is recognized; subsequently, lease payments received are recognized on a straight-line basis. Lease income included in other income on the Consolidated Statements of Operations was $92,000 and $36,000, for fiscal years 2020 and 2019, respectively. The cost of obtaining lessor contracts, which is included in other assets on the Consolidated Balance Sheets, was $7,000 and $0 at June 30, 2020, and June 30, 2019, respectively.
A summary analysis of annual undiscounted cash flows to be received on leases as of June 30, 2020, is as follows:
(dollars in thousands)
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
|
2021
|
|
$
|
97
|
|
2022
|
|
|
81
|
|
2023
|
|
|
34
|
|
Total lease payments
|
|
$
|
212
|
|
The Company may terminate the building leases with one hundred eighty days written notice if it sells the property. If the Company terminates the lease, the Company will pay the tenant a termination fee of the lesser of six months of the base monthly rent or the base monthly rent times the number of months remaining in the initial term.
NOTE 12. BENEFIT PLANS
The Company offers a savings and investment plan qualified under Section 401(k) of the Internal Revenue Code covering substantially all employees. In connection with this 401(k) plan, participants can voluntarily contribute a portion of their compensation, up to certain limitations, to this plan, and the Company will match 100 percent of participants’ contributions up to the first 3 percent of compensation and 50 percent of the next 2 percent of compensation. The Company recorded expenses for contributions to the 401(k) plan of $77,000 and $81,000 for fiscal years 2020 and 2019, respectively.
The 401(k) plan allows for a discretionary profit sharing contribution by the Company, as authorized by the Board of Directors. No profit sharing contributions were made in fiscal years 2020 or 2019.
The Company offers employees, including its executive officers, an opportunity to participate in savings programs using mutual funds managed by the Company. Employees may contribute to an IRA, and the Company matches these contributions on a limited basis. A similar savings plan utilizing Uniform Gifts to Minors Act (“UGMA”) accounts is offered to employees to save for their minor relatives. The Company match, reflected in base salary expense, aggregated in all programs to $16,000 and $17,000 in fiscal years 2020 and 2019, respectively.
The Company has an Employee Stock Purchase Plan whereby eligible employees can purchase treasury shares at market price. During fiscal years 2020 and 2019, employees purchased 1,648 and 2,461, respectively, shares of treasury stock from the Company.
NOTE 13. SHAREHOLDERS’ EQUITY
The Company has three classes of common equity: class A, class B, and class C common stock. The Company’s class A common stock is traded over-the-counter and is quoted daily under NASDAQ’s Capital Markets under the symbol “GROW.” There is no established public trading market for the Company’s class B and class C common stock. There are no shares of class B stock issued as of June 30, 2020, or 2019.
The Company’s class A and class B common stock have no voting privileges.
Dividends
Dividends of $0.0025 per share per month totaling $390,000 and $392,000 were paid to holders of class A common stock in fiscal years 2020 and 2019, respectively. Dividends of $62,000 and $62,000 were paid to holders of class C common stock in fiscal years 2020 and 2019, respectively.
The monthly dividend of $0.0025 is authorized through September 2020 and will be considered for continuation at that time by the Board. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company and general business conditions. On a per share basis, the holders of the class C common stock and the nonvoting class A common stock participate equally in dividends as declared by the Company’s Board of Directors.
Share Repurchase Plan
The Company has a share repurchase program, approved by the Board of Directors, authorizing the Company to annually purchase up to $2.75 million of its outstanding common shares, as market and business conditions warrant, on the open market in compliance with Rule 10b-18 of the Securities Exchange Act of 1934 through December 31, 2020. The repurchase program has been in place since December 2012, and the Board of Directors has annually renewed the repurchase program each calendar year. The acquired shares may be used for corporate purposes, including shares issued to employees in the Company’s stock-based compensation programs. As of June 30, 2020, approximately $2.64 million remains available for repurchase under this authorization.
During fiscal years 2020 and 2019, the Company repurchased 105,721 and 20,575, respectively, of its class A shares on the open market using cash of $113,000 and $24,000, respectively. To date, the Company has repurchased a total of 666,531 class A shares under the repurchase program using cash of $1.5 million.
Other Activity
The Company did not grant any shares of class A common stock to employees during fiscal year 2020 or 2019.
The Company granted 3,600 and 3,600 of class A common stock at a weighted average fair value of $1.61 and $1.34 per share to its non-employee directors in fiscal years 2020 and 2019, respectively.
The Company granted 50,000 shares of class A common stock at a weighted average fair value of $1.95 per share to a key advisor in fiscal year 2020. No shares were granted to outside parties in fiscal year 2019.
All stock grants vest immediately after issuance.
Issuances of treasury stock for grants, bonuses, and the share repurchase plan are accounted for using the weighted-average cost basis of the shares issued. During fiscal years 2020 and 2019, shares were issued, as described above, with a weighted-average cost basis greater than current fair value, which resulted in a combined negative adjustment to additional paid-in capital of approximately $17,000 and $6,000, respectively.
Shareholders of class C shares are allowed to convert to class A. During fiscal years 2020 and 2019, 162 and 60 shares, respectively, were converted from class C to class A. Conversions are one class A share for one class C share and are recorded at par value. There are no restrictions or requirements to convert.
Stock Option Plans
In November 1989, the Board of Directors adopted the 1989 Non-Qualified Stock Option Plan (“1989 Plan”), amended in December 1991, which provides for the granting of options to purchase 1,600,000 shares of the Company’s class A common stock to directors, officers and employees of the Company and its subsidiaries. Options issued under the 1989 Plan vest six months from the grant date or 20 percent on the first, second, third, fourth, and fifth anniversaries of the grant date. Options issued under the 1989 Plan expire ten years after issuance. No options were granted in fiscal years 2020 or 2019. As of June 30, 2020, there were no options outstanding under the 1989 Plan.
In April 1997, the Board of Directors adopted the 1997 Non-Qualified Stock Option Plan (“1997 Plan”), which provides for the granting of stock appreciation rights (SARs) and/or options to purchase 400,000 shares of the Company’s class A common stock to directors, officers, and employees of the Company and its subsidiaries. Options issued under the 1997 Plan expire ten years after issuance. There were 2,000 options that were forfeited and no options granted or exercised during the year ended June 30, 2020. There were no options granted, exercised, or forfeited for the year ended June 30, 2019.As of June 30, 2020, there were 2,000 options outstanding under the 1997 Plan.
The estimated fair value of options granted is amortized to expense over the options’ vesting period. The fair value of these options is estimated at the date of the grant using a Black-Scholes option pricing model.
Stock option transactions under the 1997 Plan for the past two fiscal years are summarized below:
(dollars in thousands, except price data)
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Life in Years
|
|
|
Aggregate Intrinsic
Value (net of tax)
|
|
Outstanding June 30, 2018
|
|
|
4,000
|
|
|
$
|
7.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2019
|
|
|
4,000
|
|
|
$
|
7.53
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
$
|
12.31
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2020
|
|
|
2,000
|
|
|
$
|
2.74
|
|
|
|
7.72
|
|
|
$
|
-
|
|
Class A common stock options outstanding and exercisable under the employee stock option plans at June 30, 2020, were as follows:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Date of
Option Grant
|
|
Number
Outstanding
|
|
|
Remaining
Life in Years
|
|
|
Weighted Average
Exercise Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Option Price ($)
|
|
1997 Plan Class A
|
03/21/18
|
|
|
2,000
|
|
|
|
7.72
|
|
|
$
|
2.74
|
|
|
|
2,000
|
|
|
$
|
2.74
|
|
|
|
|
|
2,000
|
|
|
|
7.72
|
|
|
$
|
2.74
|
|
|
|
2,000
|
|
|
$
|
2.74
|
|
NOTE 14. INCOME TAXES
The Company and its non-Canadian subsidiaries file a consolidated U.S. federal income tax return. USCAN files a separate tax return in Canada. Provisions for income taxes include deferred taxes for temporary differences in the bases of assets and liabilities for financial and tax purposes resulting from the use of the liability method of accounting for income taxes.
The CARES Act was signed into law on March 27, 2020. While a number of the CARES Act’s provisions will be reflected in future accounting periods, certain income tax accounting measures are reflected in the period of enactment. The business tax provisions of the Act include temporary changes to income and non-income-based tax laws. Some of the key income tax provisions that may affect the Company include:
|
●
|
Eliminating the 80% of taxable income limitations by allowing corporate entities to fully utilize net operating loss (NOL) carryforwards generated during the 2019 and 2020 fiscal years to offset taxable income in the 2019, 2020 or 2021 fiscal years and reinstating the limitation with the 2022 fiscal year;
|
|
●
|
Allowing net operating losses generated in fiscal years 2019, 2020 or 2021(tax years 2018, 2019 and 2020) to be carried back five years;
|
|
●
|
Allowing entities to deduct more of their charitable cash contributions made during calendar year 2020 by increasing the taxable income limitation to 25% from 10%.
|
|
●
|
Modification of the adjusted taxable income limitation from 30% to 50% for fiscal years 2020 and 2021 (tax years 2019 and 2020) for computing deductible interest.
|
Carryovers
For U.S. federal income tax purposes at June 30, 2020, the Company has U.S. federal net operating loss carryovers of $8.8 million with $2.0 million and $2.7 million expiring in fiscal years 2035 and 2036, respectively, and $4.1 million with no expiration. The carryover amount of $4.1 million, which was generated after fiscal year 2018, may be carried forward indefinitely with no limitation on usage prior to fiscal year 2022, but certain limitations apply to the utilization of net operating losses thereafter. The Company has capital loss carryovers of $1.1 million with $728,000 and $348,000 expiring in fiscal years 2022 and 2023, respectively. The Company has charitable contribution carryovers totaling approximately $36,000 with $5,000; $10,000; $5,000; and $16,000 expiring in fiscal years 2021, 2023, 2024, and 2025, respectively.
For Canadian income tax purposes, USCAN has net operating loss carryovers of $122,000 that expire in fiscal year 2040.
If certain changes in the Company's ownership should occur, there could be an annual limitation on the amount of net operating loss carryovers that could be utilized.
Additional Disclosures
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax amount will not be realized. At June 30, 2020, and 2019, a valuation allowance of $2.8 million and $1.9 million, respectively, was included to fully reserve for net operating loss carryovers, other carryovers and certain book/tax differences in the balance sheet.
The Company's components of income (loss) before tax by jurisdiction are as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
(3,261
|
)
|
|
$
|
(1,613
|
)
|
Canada
|
|
|
(1,716
|
)
|
|
|
(2,803
|
)
|
Total
|
|
$
|
(4,977
|
)
|
|
$
|
(4,416
|
)
|
The reconciliation of income tax computed at U.S. federal statutory rates to income tax expense is as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
% of Pretax
|
|
|
2019
|
|
|
% of Pretax
|
|
Tax expense (benefit) at statutory rate - continuing operations
|
|
$
|
(974
|
)
|
|
|
21.0
|
%
|
|
$
|
(896
|
)
|
|
|
21.0
|
%
|
Tax benefit from change in foreign unrealized gain/loss
|
|
|
(203
|
)
|
|
|
4.4
|
%
|
|
|
(679
|
)
|
|
|
15.9
|
%
|
Change in valuation allowance
|
|
|
885
|
|
|
|
(19.1
|
%)
|
|
|
353
|
|
|
|
(8.3
|
%)
|
Rate difference on foreign deferred income
|
|
|
153
|
|
|
|
(3.3
|
%)
|
|
|
327
|
|
|
|
(7.7
|
%)
|
Other
|
|
|
(36
|
)
|
|
|
0.8
|
%
|
|
|
(82
|
)
|
|
|
2.0
|
%
|
Total tax expense (benefit) - continuing operations
|
|
$
|
(175
|
)
|
|
|
3.8
|
%
|
|
$
|
(977
|
)
|
|
|
22.9
|
%
|
Components of total tax expense (benefit) are as follows:
|
|
Year ended June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
Current tax expense (benefit) - U.S. Federal
|
|
$
|
(1
|
)
|
|
$
|
4
|
|
Current tax expense (benefit) - Non-U.S.
|
|
|
3
|
|
|
|
(15
|
)
|
Deferred tax expense - U.S. Federal
|
|
|
-
|
|
|
|
-
|
|
Deferred tax benefit - Non-U.S.
|
|
|
(177
|
)
|
|
|
(966
|
)
|
Total tax benefit - continuing operations
|
|
$
|
(175
|
)
|
|
$
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
Current tax expense (benefit) - Non-U.S.
|
|
|
-
|
|
|
|
-
|
|
Total tax benefit
|
|
$
|
(175
|
)
|
|
$
|
(977
|
)
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company’s deferred assets and liabilities are as follows:
|
|
June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Book/tax differences in the balance sheet
|
|
|
|
|
|
|
|
|
Investments in securities at fair value
|
|
$
|
448
|
|
|
$
|
(99
|
)
|
Prepaid expenses
|
|
|
(50
|
)
|
|
|
(45
|
)
|
Accumulated depreciation
|
|
|
105
|
|
|
|
111
|
|
Other investments
|
|
|
(65
|
)
|
|
|
(124
|
)
|
Equity method investments
|
|
|
14
|
|
|
|
(6
|
)
|
Accrued expenses
|
|
|
148
|
|
|
|
72
|
|
Product start-up costs
|
|
|
60
|
|
|
|
60
|
|
Other
|
|
|
(19
|
)
|
|
|
(55
|
)
|
Tax Carryovers
|
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
|
1,887
|
|
|
|
1,573
|
|
Charitable contributions carryover
|
|
|
8
|
|
|
|
8
|
|
Capital loss carryover
|
|
|
226
|
|
|
|
249
|
|
Valuation Allowance
|
|
|
(2,762
|
)
|
|
|
(1,877
|
)
|
Net deferred tax liability
|
|
$
|
-
|
|
|
$
|
(133
|
)
|
NOTE 15. EARNINGS PER SHARE
The following table sets forth the computation for basic and diluted earnings per share (EPS):
|
|
Year Ended June 30,
|
|
(dollars in thousands, except per share data)
|
|
2020
|
|
|
2019
|
|
Loss from Continuing Operations
|
|
$
|
(4,464
|
)
|
|
$
|
(3,292
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Discontinued Operations
|
|
|
(338
|
)
|
|
|
(147
|
)
|
Less: Net Loss Attributable to Non-Controlling Interest from Discontinued Operations
|
|
|
(118
|
)
|
|
|
(51
|
)
|
Net Loss Attributable from Discontinued Operations to U.S. Global Investors, Inc.
|
|
|
(220
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to U.S. Global Investors, Inc.
|
|
$
|
(4,684
|
)
|
|
$
|
(3,388
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of outstanding shares
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,108,394
|
|
|
|
15,138,351
|
|
Effect of dilutive securities :
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
-
|
|
|
|
-
|
|
Diluted
|
|
|
15,108,394
|
|
|
|
15,138,351
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Attributable to U.S. Global Investors, Inc.
|
|
|
|
|
|
|
|
|
Basic Net Loss per Share
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.30
|
)
|
|
$
|
(0.22
|
)
|
Loss from discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
Net loss
|
|
$
|
(0.31
|
)
|
|
$
|
(0.22
|
)
|
Diluted Net Loss per Share
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.30
|
)
|
|
$
|
(0.22
|
)
|
Loss from discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
Net loss
|
|
$
|
(0.31
|
)
|
|
$
|
(0.22
|
)
|
The diluted EPS calculation excludes the effect of stock options when their exercise prices exceed the average market price for the period. For the years ended June 30, 2020, and 2019, 2,000 and 4,000 employee stock options, respectively, were excluded from diluted EPS.
During fiscal years 2020 and 2019, the Company repurchased class A shares on the open market. Repurchased shares are classified as treasury shares and are deducted from outstanding shares in the earnings per share calculation.
NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in accumulated other comprehensive income (loss) by component:
|
|
Year Ended June 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Beginning Balance
|
|
$
|
(206
|
)
|
|
$
|
1,858
|
|
Foreign currency translation adjustment, net of tax 1
|
|
|
(26
|
)
|
|
|
3
|
|
Amount reclassified from AOCI, net of tax 1
|
|
|
228
|
|
|
|
22
|
|
Reclassification as a result of adoption of accounting guidance 2
|
|
|
-
|
|
|
|
(2,089
|
)
|
Ending Balance
|
|
$
|
(4
|
)
|
|
$
|
(206
|
)
|
1.
|
Amounts include no tax expense or benefit.
|
2.
|
Effective July 1, 2018, upon adoption of ASU 2016-01, the Company no longer has an available-for-sale category for equity securities for which changes in fair value are recognized in other comprehensive income (loss).
|
NOTE 17. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company manages the following business segments on a continuing operations basis:
|
1.
|
Investment management services, by which the Company offers, to USGIF and ETF clients, a range of investment management products and services to meet the needs of individual and institutional investors; and
|
|
2.
|
Corporate investments, through which the Company invests for its own account in an effort to add growth and value to its cash position.
|
The following schedule details total revenues and income by business segment:
(dollars in thousands)
|
|
Investment Management Services
|
|
|
Corporate Investments
|
|
|
Consolidated
|
|
Year ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
4,476
|
|
|
$
|
-
|
|
|
$
|
4,476
|
|
Investment loss
|
|
$
|
-
|
|
|
$
|
(2,211
|
)
|
|
$
|
(2,211
|
)
|
Loss from equity method investments
|
|
$
|
-
|
|
|
$
|
(142
|
)
|
|
$
|
(142
|
)
|
Other income
|
|
$
|
117
|
|
|
$
|
-
|
|
|
$
|
117
|
|
Loss from continuing operations before income taxes
|
|
$
|
(2,071
|
)
|
|
$
|
(2,568
|
)
|
|
$
|
(4,639
|
)
|
Depreciation and amortization
|
|
$
|
202
|
|
|
$
|
-
|
|
|
$
|
202
|
|
Gross identifiable assets at June 30, 2020
|
|
$
|
5,654
|
|
|
$
|
13,162
|
|
|
$
|
18,816
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
Consolidated total assets at June 30, 2020
|
|
|
|
|
|
|
|
|
|
$
|
18,816
|
|
Year ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
3,459
|
|
|
$
|
-
|
|
|
$
|
3,459
|
|
Investment loss
|
|
$
|
-
|
|
|
$
|
(1,582
|
)
|
|
$
|
(1,582
|
)
|
Income from equity method investments
|
|
$
|
-
|
|
|
$
|
23
|
|
|
$
|
23
|
|
Other income
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
47
|
|
Loss from continuing operations before income taxes
|
|
$
|
(2,444
|
)
|
|
$
|
(1,825
|
)
|
|
$
|
(4,269
|
)
|
Depreciation and amortization
|
|
$
|
201
|
|
|
$
|
13
|
|
|
$
|
214
|
|
Net operating revenues from investment management services include revenues from USGIF of $2.7 million and $2.9 million in fiscal years 2020 and 2019, respectively. Net operating revenues from investment management services also include operating revenues from ETF clients of $1.7 million and $588,000 in fiscal years 2020 and 2019, respectively.
NOTE 18. RELATED PARTY TRANSACTIONS
On June 30, 2020, and 2019, the Company had $7.0 million and $8.8 million, respectively, at fair value invested in USGIF funds the Company advised. These amounts were included in the Consolidated Balance Sheets as “investments in securities at fair value.” The Company recorded $97,000 and $181,000 in income from dividends and capital gain distributions from USGIF investments in fiscal years 2020 and 2019, respectively. The Company recorded $23,000 in net realized gains on its investments in the Funds in fiscal year 2019. There were no net realized gains or losses on its investments in the Funds in fiscal year 2020.
In addition, the Company had $158,000 and $309,000 at June 30, 2020, and 2019, respectively, invested in a fund advised by Galileo accounted for under the equity method of accounting. The Company recorded income (loss) from equity method investments of ($142,000) and $23,000 in fiscal years 2020 and 2019, respectively. See further discussion of these investments in Note 4.
The Company earned advisory and administrative services fees, as applicable, from the various funds for which it acts as investment adviser, as disclosed in Note 5. Receivables include amounts due from the funds for those fees and out-of-pocket expenses, net of amounts payable to the funds for expense reimbursements. As of June 30, 2020, and 2019, the Company had $869,000 and $201,000, respectively, of receivables from mutual funds included in the Consolidated Balance Sheets within “receivables.”
As discussed in Note 4, the Company has an investment in HIVE that was valued at approximately $2.4 million and $3.6 million as of June 30, 2020, and 2019, respectively. Frank Holmes, a director and Chief Executive Officer of the Company, is the non-executive chairman of HIVE, for which he received director fees from HIVE during fiscal years 2020 and 2019. Mr. Holmes held shares and options of HIVE at June 30, 2020, and 2019. Effective August 31, 2018, upon the retirement of HIVE’s CEO and until a new CEO is hired, Mr. Holmes became Interim Executive Chairman of HIVE.
As discussed in Note 4, the Company holds an investment in Thunderbird that was valued at approximately $1.2 million and $1.1 million as of June 30, 2020, and 2019, respectively. Thunderbird was previously a private company that underwent a corporate transaction and started trading on an exchange during fiscal year 2019. Frank Holmes serves on the board of this company as a director, for which he receives fees, and held options at June 30, 2020, and 2019. The Company received $31,000 in dividend income from its investment in this company in fiscal year 2019. No dividend income from this investment was received in fiscal year 2020.
As discussed in Note 4, the Company purchased in fiscal year 2019 an investment in GoldSpot that was valued at approximately $806,000 and $1.7 million as of June 30, 2020, and 2019, respectively. Frank Holmes served on the board of this company as director from February 2019 to June 2020 and as independent chairman from February 2019 to May 2020 and held common stock and options at June 30, 2020.
NOTE 19. CONTINGENCIES AND COMMITMENTS
The Company continuously reviews all investor, employee, and vendor complaints and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated through consultation with legal counsel, and a loss contingency is recorded if probable and reasonably estimable.
During the normal course of business, the Company may be subject to claims, legal proceedings, and other contingencies. These matters are subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably. The Company establishes accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial statements of the Company.
The Board of Directors has authorized a monthly dividend of $0.0025 per share from July 2020 through September 2020, at which time it will be considered for continuation by the Board of Directors. Payment of cash dividends is within the discretion of the Company’s Board of Directors and is dependent on earnings, operations, capital requirements, general financial condition of the Company and general business conditions. The total amount of cash dividends to be paid to class A and class C shareholders from July 2020 to September 2020 will be approximately $113,000.
The outbreak of the COVID-19 pandemic and the resulting actions to control or slow the spread has had a significant detrimental effect on the global and domestic economies and financial markets. The Company continues to monitor the impact of COVID-19, but at the date of this report it is too early to determine the full impact this virus may have on the financial markets and economy. Should this emerging macro-economic risk continue for an extended period, there could be an adverse material financial impact to our business and investments, including a material reduction in our results of operations.